The Wall Street Journal gives a teaser, in the form of excerpts from a speech to be made later today, on new rules the Consumer Financial Protection Bureau will be implementing to regulate how servicers treat homeowners who become severely delinquent on their mortgages. Unlike past efforts to stop servicer abuses, the CFPB’s new rules will cover all servicers, as opposed to bank-affiliated ones.

Under the rules laid out by the agency, lenders would be barred from starting the foreclosure process until borrowers have missed at least four months of payments, a move designed to give borrowers time to submit applications for help. This requirement would end so-called dual-tracking—starting foreclosure if a borrower has applied for help.

They are required to send a written notice to borrowers within 15 days of a second missed payment that includes examples of alternatives to foreclosure and information about housing counseling. Servicers are barred from completing a foreclosure if a borrower submits an application for aid more than 37 days before the home is scheduled to be repossessed.

The consumer regulator will have the power to police whether loan services are following these mandates.

The article noted that both consumer groups and investors wanted even stronger requirements for servicers to offer modifications in particular circumstances.

I’m highly skeptical that these new measures will make much of a difference unless the CFPB has aggressive monitoring and tough penalties, and those details have yet to be released. The sorry history of the servicing industry is, again and again, various servicing standards have been promulgated and are routinely violated, even with consent orders in place. Look at the state/federal mortgage settlement put in place early last year, which also put in place supposedly improved servicing standards, including an end to dual tracking.

The five big banks that agreed in a $25 billion mortgage settlement to reform foreclosure practices have continued to “dual-track” homeowners, an abusive technique that pushes families out of homes they thought their bank was trying to help them save, according to a new report by a monitor overseeing the settlement in California.

And if you think that was because banks were having trouble implementing new procedures, think again. Look at this pathetic bleat from the national settlement monitor, Joseph Smith, on January 4 (hat tip Lisa Epstein):

Translation: the banks are still fucking over borrowers, not sure what we’ll do, but we gotta look like we are doing something, so stay tuned!

Why aren’t these bad practices being stopped? As we discussed at depressing length last year (aided by Abigail Field’s close reading of the often mind-numbing exhibits on metrics), the state/federal settlement was a joke, in that its metrics allowed for remarkably high error rates, including an astonishing 1% wrongful foreclosures. Field estimated that had the rules been in place as of 2008, over 33,000 illegal foreclosures would have been deemed tolerable by regulators. Of course, we had more than that, but with even higher error rates allowed in other categories, it’s not hard to imagine that in the rare event a servicer was subjected to close scrutiny, he’d be able to get away with even more wrongful foreclosures by virtue of artful classification of the abuses (ie, if a foreclosure resulted from forced place insurance, the servicer no doubt would argue that the foreclosure would belong in a category relating to excessive fees rather than “wrongful foreclosure”).

And the bigger reason that regulators for now a full decade have had no success in cleaning up the servicing morass is that servicers aren’t paid enough to service delinquent loans well, let alone do loan mods, which requires even more effort and highly skilled staff. The only way for them to earn decent incomes on delinquent borrowers is by collecting more fees on them when they go into the foreclosure process and otherwise ignoring them. On top of that, servicers have terrible software both as a result of antiquated but widely used platforms like LPS’ Desktop Manager, notes passing through multiple servicers as a result of mergers and bankruptcies, and lousy database management and integration. I’ve asked repeatedly why borrower data can’t be ported into new systems, and I’m told by servicing industry insiders is not just a matter difficulties in resolving data field parameters, but that in the older systems, a lot of data is just not there.

So until the industry gets together (and this means, at a minimum, the “sell side” as in the originators, the servicers and investors) and comes up with a new fee structure for servicing, I don’t see how anything changes (I won’t elaborate here, but that would be a massive undertaking, and I’ve not seen this idea floated even as a wild-eyed aspiration). Servicers will abuse customers and argue to regulators that they can’t do better because doing better would lose them boatloads of money, so regulators will continue to enforce only weakly (the threat is they’d abandon the business, although I’m told a servicer can’t abandon its servicing obligation, but I would not underestimate banks trying to argue that parent organizations aren’t liable for the problems in servicing subsidiaries, and if the servicing sub goes broke, no one will take up the servicing rights if all it is is a license to lose money. I’m not sure they will have managed the corporate entities on enough of an arm’s length basis for that legal dog to hunt, but a regulator might also be loath to get into a pigfight that it might lose).

So the test of the effectiveness of these new rules will be whether, when they details are published, they elicit howls of pain from the banking industry, since proper servicing of loans gone bad loses money. If not, rest assured that the most long-suffering borrowers will see is marginal improvement, not badly needed large-scale reforms.

See my post below on Holder in Due Course. The consumer/borrower should now be much more likely to be able to at least get his day in court to assert problems with the loan at origination and that the foreclosure was improper in some ways. In no way does the QM rule mean that lenders don’t have to follow foreclosure laws.

On further thought, I don’t see this as having any impact of FC procedures.

First, in title theory states, the analysis focuses on the mortgage, not the note. See Ibanez, for instance.

Second, QM was focused on whether (effectively) the bank had originated a loan that was high risk but had failed to do an adequate job of assessing ability to pay. That is a separate set of issues from court procedures in foreclose. There has been no change in FC procedures (state law base) except a borrow has a NEW defense on non QM mortgages, and that relates to loan underwriting (the adequacy of the analysis of borrower ability to pay).

Third, many judges have seen fit to ignore “show me the note” defenses. And even when the bank can scrounge up an original note, it has to have been conveyed properly in terms of the requirements of the PSA, yet most judges who have been overseeing RE cases for years don’t want to hear about PSAs.

“Mr. Davet’s argument — NationsBanc couldn’t bring the suit because it didn’t legally own his mortgage — is the same red-hot legal theory now being embraced by judges and regulators in Ohio and elsewhere to help give homeowners a chance against foreclosure. Is this all about a legal system at work, or not working? ”

I don’t know where you have been. This blog was onto that issue before the robosigning scandal. We’ve recounted at length documentation failure that took place in the origination of mortgage backed securities and are VERY well aware of how this has played out in various courtrooms in the US. Many judges reject arguments based on standing even when the borrower can muster persuasive evidence. They just don’t want to hear it, and in many states, appellate judges have fallen in line. I’m sympathetic to the argument, trust me, but it is not a winner in most cases. And your quote is from 2007. This is an old theory at this point, and borrowers are getting steamrolled.

The real problem is that servicers won’t do mods. The FCs and hard fought battles over FCs are a symptom of their bad incentives.

“Translation: the banks are still fucking over borrowers, not sure what we’ll do, but we gotta look like we are doing something, so stay tuned!”

So, Yves, What do you think Joe & Co. will do about a “fucking over” rule after reading this column. He says he values our insight. (Maybe he just didn’t look out the window. It’s early yet.) But there MUST be an existant “fucking over” rule already for Servicers to ignore. Did they look in the Constitution? Those Forefathers thought of everything else.

It’d be good if National Mortgage Settlement Working Group could ‘get out front’ on this “fucking over” rule as the Servicers are now in charge of the INDEPENDENT evaluations and awards for borrower harm in the OCC’s Independent Mortgage Review too. Hate to see a “fucking over” metric come in too late in the game for Servicers to apply! That would be a shame.

NMSWG is in FULL swing now that they’ve returned refreshed & tanned from the holidays. They’re going to apply rules, and metrics; they’ll do some testing and they’re even going to do a RULE BOOK! Strange with all that, that they didn’t pick up on Servicers still “fucking people over” with the mods & dual tracking. We know there are rules about the latter two, so it MUST be the former we’re falling short on!

I think you missed that the OCC reviews were “settled” so there are no foreclosure investigations. They were shut down. Oh and the OCC and Fed didn’t negotiate how the servicers should compensate homeowners. So I’d expect them to pay as little as possible to as many as possible, since they’ll also ask for a waiver of liability.

I am more aware than I’d like to be that the OCC settled, but, based on the above article, Servicers play the critical roles of a. spotting harm, and b. determining what ‘compensation bucket’ the borrower is placed in. Why am I being asked to trust them? When is someone going to tell these Servicers to get out of the room and to never touch my stuff again?

I said servicers had and continue to have incentives to put borrowers into foreclosure rather than do mods. Those incentives remain unless the CFPB is very vigorous in enforcement and imposes meaningful fines.

And the world is not getting rid of servicers. If a financial crisis that nearly wrecked the world economy, in which securitization played a role, didn’t change how we do real estate finance, nothing will.

I floated a biscuit some time ago that non profit credit counseling agencies could step up and fill a portion of the void with mod’s, and servicing. I can even see local brick and mortar type of infrastructure assisting communities to manage “banker walk away” homes.

The infrastructure is there to build on, but requires funding.

At the time, I suggested the effort to bring non profit CCA’s in as meaningfulr solution providers, could be funded from the TBD national mortgage settlement.

States alread regulate them, so local controls exist.

The CFPB identified CCA’s early on as potential non-bank larger participants. Still waiting on CFPB definition in this regard, but national rule making and regulatory purview of CCA’s makes sense.

Exempt CCA’s are already subject to 501c3 & 501q audits.

The funding and carrot/stick ship sailed with the settlement. Besides, the idea went off like a fart in church anyway.

This is a bit in the weeds of legal complexity but appears to be very significant to what is developing. The entire secondary mortgage market has always depended on the Holder in Due Course doctrine to avoid any kind of liability (and related legal costs) for what happens when a loan is originated.

Holder in Due Course was a legal doctrine developed for 19th century British mercantilism and has always been problematic when applied to consumer lending because it prevents the consumer from asserting any legal defenses against an assignee of a promissory note.

Regardless of whether it provides a “safe harbor” or not, doesn’t the QM regulation make the promise to pay in a promissory note conditional on a consumer’s ability to re-pay? While the creditor may be able to establish that the safe-harbor rules were met in court, the obligation is conditional on the creditor doing so.

Whether or not an assignee of a note is a Holder in Due Course is binary. An assignee can’t get HDC status by proving a condition to pay has been met. If a condition exists, the promise to pay is not “unconditional” which is what is required for HDC status.

Pretty much the entire structure of the mortgage secondary market is based on assignees of notes and mortgages having HDC status – including reps and warranties on transfer agreements. Doesn’t QM force an entire re-thinking of secondary market economics – or at least documentation?

More importantly, doesn’t the QM regulation now give the borrower his day in court for the first time in the mortgage world to assert defenses against the assignee(s)of the borrower’s note? Until now, the assignee could just assert HDC status.

Granted, the assignees can show up in court to prove the safe harbor was met but this still would appear to significantly change the economics and relative bargaining power of the parties.

Excellent discussion of the holder in due course (HDC) principle for which the REMIC Trusts were created The fact that the notes were not endorsed, the mortgages were not assigned and neither document was every delivered to the trust for value goes right to the heart of the liability issue which you have raised. Where the servicer for the REMIC Trust purports to have standing to foreclose, it cannot do so if the REMIC does have the endorsed note and mortgage. As Yves Smith observes above, the notes are in imaged format on a computer screen and hard copy was never properly delivered. This is the most stunning failure of the securitization process: there is no HDC protection and everyone involved is liable for RICO under the principles of wire and mail fraud for their efforts to collect loans which were never delivered to the trusts. The end-around is to have the servicer finally retrieve the note from the storage vault and prove that the servicer’s attorney is now in possession of the original (if the original still exists) but there is no HDC protection whatsoever.

Checks are (at least used to be) the best way to picture how Holder in Dues Course works. The instrument itself has to be an unconditional promise to pay and you must have possession of the instrument (check) to demand payment from the maker (the guy who wrote the check). If I give a mechanic a check to fix my car and he doesn’t do it, I have no defense against the bank if the mechanic deposits my check. It used to be the same with a borrower asserting a defense against a secondary market participant who bought the borrower’s mortgage. It appears that is no longer the case and that is a Big Deal.

The problem you describe accurately has to do with the fact that the holder never took possession of the note and violated the first precept of HDC status. What I am alluding to has to do with the unconditional promise to pay requirement. Any promise to pay in a mortgage promissory note is now by federal law conditioned on the loan having been affordable at inception and a suitable loan for the borrower.

Google a law review article called “How Negotiability Has Fouled Up the Secondary Market” by Dale Whitman. He asserted that HDC was a fiction before QM happened. QM would seem to put the nails in the coffin for HDC.

It has nothing to do with agency status. It deals with the borrower’s ability to assert defenses against who/whatever holds the borrower’s promissory note. And those defenses can be based on what occurred at origination – not just violations of foreclosure laws. Until now, the judge would not listen or let the borrower present these defenses.

Here is memo from a study committee considering changes to the Uniform Commercial Code on the issue. It basically says that most judges have (rightly or wrongly) avoided the HDC issue in mortgage foreclosure cases even as its tenability became increasingly suspect – and this was before QM.

The important point is that the assignee of the loan could assert HDC status and it ends the case for the judge. Now, the homeowner borrower can assert that the loan violated QM and the judge has to schedule a hearing. This significantly changes the economics of any negotiating a deal of some sort with the borrower.

First, the ULI is in the midst of promulgating a 50 state standard foreclosure process. Most people think this is not going to be adopted. The ULI has proposed changed to Article Two (and anther article I can’t recall which) of the UCC (which was originally created by the Uniform Law Committee, so this is their baby) and no state has adopted them.

Second, if you think the ULI is proposing that to help consumer, you are smoking something strong. The ULI is working to make FC procedures much more bank friendly, see:

It’s trumped by the Uniform Commercial Code, which has been adopted in every state. The legal analysis focuses on whether a mortgage note is an Article 1, Article 3, or Article 9 note under the UCC. I think it’s Article 1 (the parties contracted out of the UCC and stipulated their own conveyance procedures per the pooling & servicing agreement). Adam Levitin (top legal expert in the US on securitizations) thinks they are Article 9 or Article 3 instruments (non-negotiable or negotiable per the UCC). Levitin thinks they are non-negotiable, so the comparison to a check (negotiable) is incorrect:

The point is that judges today treat the promissory notes as negotiable (regardless of academic opinions otherwise) and that limits the borrower’s right to assert defenses about what went on at the time of origination. It is a complicated subject and there are lots of academic folks with very different opinions about the various issues. You might want to do a little more reading about the subject – it is actually quite interesting from a current and historical perspective.

I am considered to be enough of an expert on this topic that I taught a Federal bar course which gave CLE credit on the legal issues raised by the failure of originators to convey notes to trusts as stipulated in PSAs, with Judge Jed Rakoff moderating the panel. Please don’t insinuate, however politely, that I don’t know this beat. I do and I disagree with you.

19th century jurisprudence is irrelevant unless you can point to specific precedents that are still standing or invoke the principles you cite. They are few and far between (Carpenter v. Longan, some Gilded era decisions on New York trusts that have been carried forward by more recent rulings, etc.). Real estate law is very much in flux now thanks to securitizations, and you need to look to the recent state of play.

Many traditional legal ideas are being vitiated thanks to orchestrated efforts to make jurisprudence more business friendly, from law and economics programs to packing courts with more conservative judges. The robosiging scandal and its aftermath has made a joke of the Statute of Frauds, for instance.

Well, maybe I just didn’t explain well enough. Sorry you took offense. My point/questions didn’t have anything to do with the conveyance of the notes. It had to do more with the potential shift in negotiating power that a borrower might (or might not) have in a post QM world.

Here is another fairly extensive paper dealing with the HDC issue – again, pre-Qm. It may be elementary to you, but perhaps some other readers might find it interesting. I think it would be interesting to hear from some borrowers’ attorneys who have some on the ground experience.

And, yes, that is the point about the interpretation of law in twisted ways – i.e. that the assignee/holder of a mortgage in today should continue to be afforded the same Holder in Due Course rights as the someone who accepts a third party check.

Holder in due course is not the problem. One must consider what the real problem is here and focus on the BIG PICTURE……….. ie the “GSE Business Model” itself.

What has caused the implosion is the fact that the “investors” have learned that the implied and now explicit government guarantee is suspect. There are not enough dollars in the drawer to resolve the issue.

Despite the fact that the GSE Business Model dictates that the very people who issued the guarantee are now the ones charged with resolution, how long can that last until people figure it out. It makes one wonder if there is a ulterior motive to banning the sale of ammo.

The GSEs are operated by remote control by the financial institutions that benefit as players in the Model financially. That will not end until people take the time to figure it out.

You touch on the fact that “servicers are not paid to service loans well.” So why would they agree to do it? Certainly carte blanche to charge bogus fees, forced place insurance, etc is one motivator. But I think a more nefarious business model exists. Most of the MBS trusts these servicers “service” are empty – the money “passed through” within a year or two. The hapless MBS buyers were told the monthly income stream dried up because “deadbeat borrowers” quit paying. Most PSA prohibit them from claiming the underlying collateral, so the investors mark them OTTI, while the servicer continues to pocket the monthly income stream until they decide to pull the trigger and manufacture a default, running up large fees that make it impossible for the homeowner to get caught up. They then FC with forged assignments which the courts never question, come to the sale with a credit bid – padded with their “foreclosure expenses” – and KACHING. Throw in loan mod bonuses and Mortgage Insurance and its a triple payout. They were promised if they just played along in the front end…they would be allowed to pick the bones vulture style in the back end. All they had to do is look the other way as to the real purpose of these MBS “trusts” which is to launder money and escape taxes. The “trustee banks” (who were also the underwriters of these deals) cannot balk at the use of their names to cheat both investors and homeowners without exposing their own malfeasence. The servicers share a little of the loot with the local yokel lawyers and courts to keep anyone from asking too many questions, submit to a few cost of business fines to keep the regulators at bay,and walk away with enough dough to more than make up for the paltry servicing fees and slap on the wrist fines. It is ingenious, really – they have mastered the art of the quadruple double cross – they have silmultaneously screwed over the underwriters, the investors, the homeowners AND the regulators(taxpayers).

Servicers get paid a fee that is a % of the principal balance for servicing. They make money on borrowers who pay on time. They lose money on borrowers that are delinquent. They lose less money (and by engaging in predatory practices, can make money) on borrowers they foreclose on. They lose boatloads if they do mods, it’s high touch and they don’t get any additional compensation for that.

The fee levels assumed only a small % of delinquencies. That turned out not to be what happened.

Not that I have much hope for reforming this Kleptocracy we live in, but I think that consumer-friendly lawmakers need to start pushing a law that bans “servicing” period and requires any issuer of a loan to KEEP it and OWN it until it’s paid off.

Yep – that IS a crack-up. Software maker PClender (a la LPS)has a product that is selling like hotcakes to all of the banks that perfects the “originate to distribute” model. They basically use an outside mortgage broker to take all the underwriting/origination risk, the bank funds the loan via a correspondent bank front man, then immediately sells it on the secondary market, generating large fee income at each stage. Meet the old boss, same as the new boss.

Wow. Confirming that if CFPB was ever going to do something truly useful it would (1) make a rule that “originate to distribute” is illegal (who cares if they don’t have “jurisdiction” — all govt agencies seem to be doing whatever the hell they want these days anyway, including Treasury); and (2) making the creation, sale, distribution, use (etc.) of such software packages illegal the same as, say, crack cocaine (or even fake Louis Vuitton bags).

I wonder how many prospective mortgage borrowers are aware of this (outside of the ones that got caught in the fraudclosure years).

Tenant advocates have been dealing with the servicer “problem” for years, as the banks claim that they aren’t responsible for returning tenant security deposits after a foreclosure eviction. I know, you’d think that they wouldn’t want the negative publicity involved in stiffing a tenant for a couple grand, but the press has been so bad on the issue that there hasn’t been any negative publicity.

Cities have also come up against these problems, as the suit against Deutsche Bank in LA points up.

It is outrageous that this insidious sector of the looting economy is only known to debtors or their legal services attorneys — if Mr. Barney Frank or (gasp) Bernie Sanders cared on whit about their so-called constituents, they would have started a big loud campaign to expose and destroy the fraudulent stripping of Americans’ cash by servicers.

I know, cracking myself up again. Connaughton told us that the Sanderses and Franks are all just part of Team Blue (matching jerseys, and all).

It is outrageous that this insidious sector of the looting economy is only known to debtors or their legal services attorneys — if Mr. Barney Frank or (gasp) Bernie Sanders cared on whit about their so-called constituents, they would have started a big loud campaign to expose and destroy the fraudulent stripping of Americans’ cash by servicers.

I know, cracking myself up again. Connaughton told us that the Sanderses and Franks are all just part of Team Blue (matching jerseys, and all that).